The 5% Yield Level Has Been Breached

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

With great anticipation market participants once again were focused on the release of the US inflation number for January. The CPI posted a 0.5% increase in January, slightly above the consensus of 0.4% and the year-over-year increase was 6.4%, which came in hotter than the 6.2% expectation. Yes, this marks the seventh consecutive month of declining US inflation, but clearly, the pace of moderation has slowed considerably. Furthermore, the 6.4% annualized inflation is still dramatically above the Fed's 2% objective.

The initial reaction for both equity and bond investors was quite muted, which is a bit surprising because of the consistent messages being delivered by the Federal Reserve governors that sit on the FOMC that they will not stop increasing US interest rates prematurely. A 6.4% inflation rate suggests to me that the Fed still has its work cut out for them. It doesn't appear that they will get to their preferred inflation measure of 2% in 2023.

What we have seen now in the bond markets are Treasury yields up across the yield curve, including for both the 6-month and 12-month T-bills which now have yields above 5% (both at 5.03% at 1:30 pm. This marks the first time in this interest rate cycle that yields for Treasuries have breached the 5% level. It was 2007 when the 6-month Treasury Bill last had a yield above 5%. How high will they go? Keep listening to the Fed. They haven't been wrong yet.